U.S. accounts for half of Canadian VC investment: report

TORONTO — American venture capitalists are spending record amounts in Canada, according to numbers released Monday from Toronto analyst firm Macdonald & Associates Ltd., but at least one U.S. VC says those numbers could be misleading.


the first quarter of this year, Canadian VCs dispersed $785 million, down more than $30 million from the same period last year. American investors, on the other hand, increased their Canadian dispursements by nine per cent and now account for almost half of the total investment for the nation, the firm’s president Mary Macdonald said. “”Four years ago, only three per cent of Canadian deals were financed by U.S. capital.””

While his firm continues to invest about 10 per cent of its fund in Canada, John Spirtos, general partner with Washington, D.C.-based Optical Group Capital, says there hasn’t been any significant growth in dispursements recently. The data from Macdonald & Associates could be “”largely an aberration,”” he said. “”What those numbers don’t tell you is when those amounts were disclosed.””

U.S.-funded deals could have been in the works for quite some time, he adds, and may be in second or third stages and are only being reported now.

Spirtos may not see the recent spike as indicated by the research of Macdonald, but American firms are still as interested in Canadian firms as ever.

Kodiak Venture Partners, based in Concord, Mass., invests a third of its fund in Canada, according to general partner Ilan Carmi, and has done so since 1999. “”We’re trying to maintain the balance between how much we invest in Canada and how much we invest in the U.S. There are some very good deals in Canada that offer you good investment opportunities. Pretty much in the last year we’ve maintained our ratio,”” he says.

Canada has been a good investment for U.S. firms for some time, says Spirtos. He estimates that the American dollar goes 40 to 50 per cent further north of the border due to a relatively weak Canadian dollar and provincial government incentives to invest.

One Canadian venture capitalist says he doesn’t see much American activity outside of Ontario, though. U.S. firms tend to gravitate towards hot development areas like Ottawa. “”I think Western Canada in particular, and certainly Alberta, is a much more fractured market than they would be exposed to in the U.S.,”” says David Richards, managing director of Calgary-based Network Capital Inc. “”Having said that, I think the U.S. has its own clustering issues as well. So there’s lots of things going on in Silicon Valley, but there’s not much going on in Boise.””

Kodiak has invested in almost a dozen Ottawa-area software, communications and software companies, but Spirtos says he’s more concerned with the personalities behind the companies than where they’re located. There are numerous technologists in Canada hard at work in new companies, he says, particularly after the massive layoffs experienced by companies like Nortel Networks at JDS Uniphase. Optical Group has invested with a storage company in Edmonton and a router company in Montreal.

Spirtos says he hears of Canadian entrepreneurs by following high-tech literature and by word of mouth. Kodiak is able to piggyback onto Canadian investments and has ties with Canadian VCs like Vengrowth and Altamira.

Canadian VCs are not being outdone by their American counterparts, insists John Eckert, president of the Canadian Venture Capital Association and managing partner with McLean Watson Capital. He says only three of the deals with U.S. investors were done without Canadian VCs. VCs need a local contact in any market outside their bailiwick in order to even consider an investment.

Overall, investment in Canada is poised for an upswing, says Macdonald, and start-ups will see more money come their way as the year progresses — the first quarter is typically the slowest of the year. “”I’m starting to hear that a lot of (VCs) are looking at new deals. It’s sharp and it’s a trend we’re going to be watching closely,”” she says.

“”This is the best time to invest. I think the smart money does know that,”” adds Eckert. “”The pickings are good. It’s not going to get any worse, in my view. We’re going to see more start-ups getting funding.””

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